Money Laundering — SQE1 FLK1 Legal Services

A man wants you to buy him a commercial building for £1.2 million. He sold a chain of restaurants abroad four years ago. Since then the money has passed through three accounts in two countries, and the price will come from a bank in a jurisdiction with light financial regulation. He presses for a quick completion. He will not discuss how his wealth was built up.

Placement, layering, or integration? Integration. And that one word is why this topic is worth learning properly, because if you get it wrong and act anyway, the maximum sentence is 14 years. Not a fine. Not a rebuke from the regulator. Prison. Keep the building in mind, because we come back to it twice.

Here is the route. The three stages, and the framework. Then criminal property, and how low the suspicion threshold really is. Then the three principal offences, and the defences. Then the reporting regime: who you tell, when, and how long you must wait. Then tipping off. Then terrorism, which works differently. And last, due diligence and what the regulations make your firm do.

Start with the pattern, because spotting it is half the work. Money laundering runs in three stages. Placement: getting criminal cash into the financial system, by depositing it or by buying high-value goods. Layering: moving it through complex transactions to break the trail back to the crime. Integration: the cleaned money re-enters the legitimate economy, as property, or as a business.

You are most exposed at the last two. Property transactions, company structures and trust arrangements are exactly what a launderer needs, and you are the one who makes them work. So if a client asks you to handle something unnecessarily complex, or something that makes no commercial sense, that is a red flag on its own.

Three pieces of law carry the topic. The Proceeds of Crime Act 2002 creates the offences and the reporting regime. The Terrorism Act 2000 runs a parallel regime for terrorist property. And the Money Laundering Regulations 2017 impose the due diligence and compliance duties on your firm.

Now the building block: criminal property. Property is criminal property if it constitutes or represents a person's benefit from criminal conduct, and the alleged offender knows or suspects that it does. Two limbs, and both must be satisfied. The definition is deliberately vast. Any property, anywhere in the world, derived from any criminal conduct.

Test it. A woman is buying a flat. £40,000 of her deposit is a gift from her brother, who told her he made it selling counterfeit goods. Nobody was ever arrested. Is it criminal property? Yes. No conviction is needed, and the money does not lose its character on being given away. The definition follows the benefit indirectly.

Which brings us to suspicion, and this is where candidates underestimate the law. The threshold is knows or suspects, and suspicion is a very low bar. In R v Da Silva, from 2006, the court said suspicion means a possibility, more than fanciful, that the relevant facts exist. Not certainty. Not the balance of probabilities. A real possibility. And you do not need to know which crime.

Three principal offences, sections 327 to 329, and each carries a maximum of 14 years. They are sometimes called the direct involvement offences, because they criminalise actually dealing with criminal property.

Section 327: concealing, disguising, converting or transferring criminal property, or removing it from England and Wales, Scotland or Northern Ireland. Section 328: entering into or becoming concerned in an arrangement which you know or suspect facilitates another person's acquisition, retention, use or control of criminal property. Section 329: acquiring, using or possessing it.

Keep them apart like this. Section 327 is what you do to the property. Section 328 is helping somebody else deal with it. Section 329 is having it yourself. In a scenario, ask one question. Who is doing what with the criminal property?

Back to your building buyer. Say you act, and you suspect part of the price is the proceeds of crime. Which section? Section 328. You have become concerned in an arrangement that helps him acquire and control criminal property. And note this, because it catches people out. The money never has to pass through your client account. Drawing the documents is enough.

Four defences to the principal offences. First and most important, authorised disclosure under s.338: you disclose to the National Crime Agency before the act and get consent, or the relevant period expires without refusal. Second, a reasonable excuse for not disclosing. Third, adequate consideration, but only for s.329. Fourth, overseas conduct that was lawful where it happened, unless it would also be an offence here.

That third defence is narrower than it looks. Adequate consideration means you gave fair value, which protects a solicitor taking a reasonable fee for genuine work. But under s.329(3)(c), providing services that you know or suspect may help someone carry out criminal conduct does not count as consideration at all. Suspect, and the defence goes.

So how does consent work? You report to the National Crime Agency, and you do not proceed. If it does not refuse consent within 7 working days, you may go ahead. If it does refuse, a moratorium of 31 calendar days begins, and you still cannot act. The Crown Court can extend that moratorium in further blocks, up to a total of 186 days. Not the Agency. The court.

Now the second family of offences, and this is the one that catches solicitors who never touch a penny. Sections 330 to 332 criminalise failing to report. You do not have to have dealt with criminal property at all. The maximum is 5 years.

Section 330 is yours. If you work in the regulated sector, and solicitors do, one of three states of mind triggers a duty to disclose. You know. You suspect. Or you have reasonable grounds for knowing or suspecting that another person is engaged in money laundering. Read that third limb again. Reasonable grounds is objective. Even if you genuinely suspected nothing, you commit the offence if a reasonable person in your position would have suspected.

Section 331 does the same job for the nominated officer, the Money Laundering Reporting Officer, who is the gateway between your firm and the Agency. Section 332 covers nominated officers outside the regulated sector, and there the test is knows or suspects only. No reasonable grounds limb. That difference is the examinable point.

Three defences to the failure to disclose offence. A reasonable excuse for not disclosing. Legal professional privilege, where the information came to you in privileged circumstances, meaning in connection with legal advice or legal proceedings. And a training defence under s.330(7): an employee who did not actually know or suspect has a defence if the firm never gave them the training the law requires.

But privilege has a hole in it, and the examiners aim straight at it. Privilege does not apply where the information is communicated with the intention of furthering a criminal purpose. So if the client tells you in a genuine advice context that they hold criminal property, privilege may protect you. If the client is asking you to help launder it, it does not. Report.

Tipping off. Once a report has been made, s.333A makes it an offence, in the regulated sector, to tell anyone that a report exists where that is likely to prejudice an investigation. The maximum is 2 years. You cannot tell your client you have reported them. You cannot hint. Saying there is a compliance issue may be enough, if the client can infer a report from it.

And a wider offence sits beside it. Under s.342, it is an offence to make any disclosure likely to prejudice a money laundering investigation, or to falsify, conceal, destroy or dispose of relevant documents. That one applies to everybody, not just the regulated sector, and the maximum is 5 years.

The Terrorism Act 2000 runs in parallel. Sections 15 to 18 cover fundraising, use and possession of terrorist property, funding arrangements, and laundering terrorist property. The maximum is 14 years. Section 19 is a general failure to disclose offence, and s.21A is the regulated sector version, mirroring s.330 including the reasonable grounds test.

Here is the difference that decides questions. Under the Proceeds of Crime Act, property must be derived from crime. Under the Terrorism Act, it need not be. Clean money, lawfully raised, is caught if it is destined for terrorist purposes. A charity transferring lawful donations to an organisation linked to a proscribed group holds no criminal property at all. It is still a Terrorism Act problem.

The procedure, then. Do not investigate. Do not confront the client. Make an internal report to your Money Laundering Reporting Officer immediately, and let them decide whether a suspicious activity report goes to the Agency. Report before the act if you can. If you only realise afterwards, report as soon as practicable, on your own initiative.

Red flags worth carrying into the exam hall. Unusually large cash payments. A client evasive about the source of funds. A transaction that makes no commercial sense. Instructions that change unexpectedly about where the money goes. Reluctance to provide identification. Funds from high-risk jurisdictions. Complex structures with no legitimate purpose. And a client who wants to use your client account as a bank.

Due diligence. Under the Money Laundering Regulations 2017 you must carry out customer due diligence before establishing a business relationship or carrying out an occasional transaction. Identify the client and verify their identity from a reliable, independent source. Identify any beneficial owner, meaning anyone who ultimately owns or controls more than 25% of the shares or voting rights, or otherwise exercises control.

Then understand the purpose and intended nature of the relationship, and monitor it as it runs, checking that transactions match what you know about the client. And if you cannot complete due diligence? You must not act. Not the transaction, not the relationship. And consider whether the failure itself warrants a report.

Two variations on that. Enhanced due diligence, where the risk is high: politically exposed persons, high-risk countries, relationships conducted at a distance. For a politically exposed person you also need senior management approval before you start. Since January 2024, a domestic politically exposed person starts from a lower risk position than a foreign one, though enhanced measures still apply.

Simplified due diligence goes the other way, in lower-risk cases, and lets you cut the measures down. But it is off the table the moment there is any suspicion of money laundering or terrorist financing. And even under it you must still identify the client. You may just be able to verify by less rigorous means.

Finally, what the regulations make the firm do. A written, firm-wide risk assessment, kept up to date. Policies, controls and procedures approved by senior management. Records of due diligence and of transactions kept for five years. And training for all relevant staff, at induction and regularly after it. Which is exactly why that training defence exists.

A word on how SQE1 tests this. You will not be asked to recite section numbers. You get a scenario, five answers, and one instruction: pick the best. What is being tested is whether you can spot criminal property, pick the right offence, and know what to do next.

If you keep only three. Section 328, because acting in the transaction is the solicitor's offence, and the money never has to touch your client account. Section 330, because reasonable grounds is objective and closing your eyes is no defence. And R v Da Silva, because suspicion means a possibility more than fanciful, which is a far lower bar than it sounds.

Traps the examiners set. One: suspicion is not belief. A possibility, more than fanciful, is enough, and you need not know which crime produced it. Two: under s.330 the test is objective. Genuinely not suspecting will not save you if a reasonable person in your seat would have.

Three: adequate consideration protects a reasonable fee for genuine work, but it collapses the moment you suspect your services are helping a launderer. Four: privilege is no shield when the client wants help to launder. That is the crime and fraud exception.

Five: count the consent regime properly. 7 working days for the Agency to refuse, and only if it refuses does the 31 day moratorium start, running from the refusal. Six: tipping off does not require you to say the words. If the client can infer a report, that is enough.

And one about terrorism. Terrorist property need not come from crime. Clean money, lawfully raised, is caught if it is destined for terrorist purposes. Hunting for criminal property in a Terrorism Act question loses the mark.

Quick check, and it is a calculation. A solicitor acting on a property purchase submits a suspicious activity report to the National Crime Agency on Monday 3 March, asking for consent to complete. The Agency does not reply that week. On Monday 10 March it serves notice refusing consent, and the solicitor receives it that day. Nobody has applied to the Crown Court. What is the earliest date the purchase can lawfully complete?

Three candidate answers. One: 12 March, because the seven working day notice period expires that day. Two: 9 April, because completion may take place on the last day of the 31 day moratorium. Three: 10 April, because the 31 day moratorium runs from the day the refusal was received. Pause here if you want a moment.

The answer is three. 10 April. The notice period ran from Tuesday 4 March to Wednesday 12 March, and the Agency refused inside it, on 10 March. That refusal starts the moratorium. Counting Monday 10 March as day one, 31 days takes you to 9 April inclusive. So the earliest the solicitor can act is the day after, 10 April.

Why the others fail. One is the date the notice period expired, which stopped mattering the moment consent was refused inside it. Two is out by a single day, the commonest way to lose this question. The moratorium runs to the end of 9 April, so completion happens on the 10th.

Five things to take away, and your building buyer covers the first. One: three stages, placement, layering, integration, and buying a commercial building with the proceeds is integration. Acting in it would be s.328, whether or not the money touches your client account.

Two: criminal property has two limbs, a benefit from criminal conduct plus your knowledge or suspicion, and suspicion is only a possibility more than fanciful. Three: the principal offences carry 14 years, failing to disclose carries 5, and tipping off carries 2.

Four: report internally to your Money Laundering Reporting Officer, then 7 working days for the Agency, then 31 days if consent is refused. Five: due diligence comes before you act, never after, and if you cannot complete it you must not act at all. Next time, Financial Services.

Practise this topic with exam-style questions at sqe1prep.co.uk. This episode is for education and exam revision only, not legal advice, and we are not affiliated with or endorsed by the SRA or Kaplan.